Redemptions in active equity mutual funds (MFs) hit a 20-month high in May as investors booked profits amid a sustained market rally.
Investors pulled out Rs 27,569 crore last month, the highest since September 2021, when equity MF units worth Rs 27,979 crore were redeemed. As a result, net inflows into equity schemes declined to a six-month low of Rs 3,240 crore in May, data from the Association of Mutual Funds in India (Amfi) showed on Friday.
However, gross investments into equity schemes remained elevated, with investors pumping in a record Rs 14,749 crore through systematic investment plans (SIPs). The overall inflows in May stood 21 per cent higher month-on-month at Rs 30,800 crore, the data showed.
After a weak performance between December and February, the markets have been on an upward trajectory since March-end, buoyed by robust inflows from foreign portfolio investors. In May, the Nifty50 index rose more than 2 per cent, extending its three-month gain to 5 per cent. On the other hand, the Nifty Midcap 100 index rose 6.2 per cent in May, while the Nifty Smallcap 100 index gained 5.1 per cent, stretching their three-month gains to 10 per cent and 7 per cent, respectively.
Industry executives and experts attribute the surge in outflows to profit booking and redemptions for expenses towards education and other requirements.
“Profit booking in a rising market, along with probable expenses towards vacation and education, could have led to lower investments in mutual funds in May,” observed Manish Mehta, national head (sales, marketing & digital business), Kotak Mahindra AMC.
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“The lower net inflows are due to profit booking coupled with concerns regarding the US government’s decision to raise the debt ceiling,” said Melvyn Santarita, analyst - manager research, Morningstar India.
Investors pulled out the highest amount from largecap, flexicap and thematic & sectoral schemes. The three fund categories together recorded an outflow of Rs 13,245 crore. This resulted in negative net inflows into these categories with largecap schemes recording the highest net outflow at Rs 1,362 crore. However, smallcap schemes continued to rake in good inflows. In May, net inflows into smallcap schemes stood at Rs 3,283 crore, the highest since Amfi started releasing the data in April 2019.
According to experts, this trend in inflows shows that investors are taking investment calls based on valuations. Amfi CEO NS Venkatesh said investors were finding smallcaps attractive due to improved valuations after a steep correction in FY23.
Net inflows into equity MF schemes have shown an inverse correlation with market performance in the recent past. Investors put in higher amounts into equity MF schemes during market downturns as compared to periods when markets are going up. Redemptions also go up during phases of market rally.
Active debt schemes, which recorded the highest inflows since October 2020 last month, continued to see strong inflows in most shorter-horizon schemes. Buoyed by over Rs 45,000-crore net inflows into liquid schemes, the overall net inflow into debt schemes stood at Rs 46,000 crore.
The inflows into debt schemes along with the mark-to-market gains in equity schemes in the last two months led to almost a 10 per cent rise in the total assets under management (AUM) to Rs 43.2 trillion at the end of May.
“Overall MFs have shown an uptick even in the midst of volatile markets. The MF industry’s net AUM stood at Rs 43.2 trillion as on May 31, 2023. Investors are choosing to invest in categories where they find value. This month, we observed the highest AUM through SIP, with the highest ever SIP contribution of Rs 14,749 crores and a surge in new SIP registrations. These figures indicate that retail investors have maintained their confidence in SIP as their preferred investment instrument for wealth creation,” said Venkatesh.